Picard v. Avellino (In re Bernard L. Madoff Investment Securities LLC)

Citation: 557 B.R. 89Docket: Adv. Proc. No. 08-01789(SMB), Adv.; Proc. No. 10-05421(SMB)

Court: United States Bankruptcy Court, S.D. New York; July 21, 2016; Us Bankruptcy; United States Bankruptcy Court

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Irving H. Picard, the trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS) and Bernard L. Madoff’s estate, initiated an adversary proceeding to recover fraudulent and preferential transfers and to disallow or subordinate certain claims from the defendants. The defendants, except one, filed a motion to dismiss the Trustee’s amended complaint, which spans 145 pages. The court granted the motion to dismiss for all claims related to transfers that occurred before January 1, 2001, including subsequent transfer and general partner claims, while denying the motion in other respects.

The proceeding stems from Madoff's Ponzi scheme, with Madoff arrested on December 11, 2008, leading to SEC action and the appointment of Picard as trustee. Madoff admitted to operating the scheme, and it was highlighted that BLMIS began its operations on January 1, 2001. The ruling distinguishes Madoff's prior sole proprietorship from BLMIS, the SIPA debtor.

The defendants include individual partners Frank J. Avellino and Michael Bienes, their spouses, and their son, along with the Avellino & Bienes accounting partnership, which ceased its accounting operations in 1984 to invest exclusively in BLMIS. The Avellino Family Trust, managed by Avellino, also held an account with BLMIS and received transfers from it.

The Avellino & Bienes Pension Plan Trust, managed by trustees Avellino and Bienes, included an IA account with BLMIS and received transfers from it. This plan was a precursor to the Avellino & Bienes Profit Sharing Plan and the Mayfair Pension Plan, which benefitted Avellino, Bienes, and their spouses. Following the liquidation of the A. B Pension Plan in 1992, new general partnerships were formed for investing with BLMIS, as outlined in the Amended Complaint.

Count Nine of the complaint addresses various defendants who received subsequent transfers after January 1, 2001, including the Avellino Family Trust, the A. B Pension Plan, and others, collectively termed the "Subsequent Transferees." Exhibit B details the initial transfers to accounts associated with pre-2000 transferees, while the Post-1992 Entities represent the only group receiving initial transfers after the cutoff date.

The complaint identifies subsequent transfers to numerous individuals and trusts, collectively referred to as "Post-2000 Subsequent Transferees." Madoff began his brokerage in 1960 and claimed to use various investment strategies, including a purported "split-strike conversion" strategy, to generate stable returns. However, he operated BLMIS as a Ponzi scheme, using incoming funds to pay returns to earlier investors rather than investing them as claimed.

E. Avellino and Bienes launched the first "feeder fund" for Madoff's BLMIS around 1961, pooling customer capital for discretionary securities investments. Following Alpern's retirement, the firm became A. B, with Avellino and Bienes as general partners, raising hundreds of millions of dollars and earning substantial profits. They marketed these investments as "loans," promising guaranteed annual returns of 13% to 18% while issuing letters to investors to evade regulatory scrutiny. Madoff assured high returns to them and their wives to sustain investor contributions. A. B profited by retaining the difference between the returns from BLMIS and those promised to investors. By 1984, the firm ceased its accounting operations to focus solely on investor recruitment.

In June 1992, the SEC initiated an investigation into A. B and its principals for potentially selling unregistered securities and acting as unregistered investment advisors. During the investigation, Avellino and Bienes misrepresented A. B's financial status, claiming it owed investors over $400 million, despite having $49.6 million less in its accounts. They falsely testified that A. B maintained a sufficient cushion of investments, aware of the discrepancies. Before their SEC testimony, BLMIS fabricated a fake investment advisory account and corresponding false statements dating back to 1989, which included fictitious transactions. Avellino and Bienes knew that the statements they provided to the SEC contained information about non-existent transactions.

Avellino collaborated with Madoff to manipulate A. B’s historical account statements, with Bienes’ knowledge. They returned altered statements to BLMIS to hide these modifications from the SEC and the court-appointed Receiver. On July 30, 1992, Avellino faxed December 1989 statements for various A. B accounts to BLMIS for alteration to align with false representations made to the SEC. Avellino and Bienes supplied internal A. B documents, including bank records and ledgers, to ensure the altered statements matched A. B’s internal records provided to the SEC. BLMIS produced new statements for A. B’s accounts, including fictitious transactions to mask discrepancies between owed amounts and account values. They also created "sub-accounts" with backdated transactions to offset negative balances, supporting Avellino’s and Bienes’ claims of positive cash balances.

When the Receiver sought to audit A. B’s records from 1984 to 1992, Avellino and Bienes could only provide limited documents from 1989 to 1992, the period of the altered statements. Avellino claimed A. B lacked detailed financial records and directed the audit using documents from Madoff. On July 17, 1992, efforts were made to formalize the A. B accounts with various agreements executed by Avellino, Bienes, and Mrs. Bienes.

On November 17, 1992, the SEC filed a complaint against Avellino, Bienes, and A. B, leading to a preliminary injunction on November 18, 1992, and the appointment of the Receiver to oversee A. B's liquidation, with a deadline for returning funds to investors by November 24, 1992. Madoff secured loans to facilitate these payouts. On September 7, 1993, a permanent injunction was imposed against Avellino, Bienes, and A. B from selling unregistered securities or operating an unregistered investment advisory firm.

Despite the injunction, Avellino and Bienes sought individuals to act as "front men" for new BLMIS investment vehicles, arranging partnerships with Sullivan and Powell, and agreeing to refer investors to these partnerships in exchange for 10% of the annual returns.

Avellino and Bienes received a total of $711,690 from 2000 to 2007, utilizing a network of interconnected entities lacking corporate form and business purpose, including Grosvenor Partners and Mayfair Ventures. They opened six accounts with BLMIS under these entities to evade scrutiny and hide their ongoing involvement with BLMIS while concealing fictitious profits. Funds were commingled among personal and entity accounts to maintain liquidity and manage withdrawal limits to avoid detection by Madoff.

In 1992-1993, Madoff incentivized Avellino and Bienes to encourage former A. B investors to reinvest with BLMIS by offering a guaranteed annual return of 17% on their new accounts and side payments of 2% on cash reinvestments. Although approximately $372 million was reinvested, actual side payments were not made in cash but were instead recorded as fictitious gains through purportedly profitable options transactions that never occurred. The Individual Defendants received at least $59 million in these side payments, which inflated reported rates of return, some exceeding 80%. The BLMIS "Schupt" process ensured that these guaranteed returns were maintained, with payments made through the fictitious purchase and sale of options, impacting accounts controlled by Avellino and Bienes from 1994 to 2007.

Avellino, acting on Bienes' behalf and with his knowledge, conducted annual calculations of their IA accounts to verify if the returns matched Madoff's promises. When discrepancies arose, Avellino communicated these to Madoff and DiPascali, who would then create fictitious trades to cover the shortfall. Avellino also identified accounts eligible for Schupt payments, as illustrated in a May 1996 spreadsheet he sent to DiPascali, highlighting a $434,000 discrepancy favoring him. In December 1998, Avellino prompted DiPascali to execute trades in specific accounts, revealing a $2.5 million shortfall for 1997, leading to fictitious trades of approximately $7.9 million being reported to balance the accounts.

Red flags indicating fraudulent activity included Avellino, Bienes, and Thomas Avellino's awareness or willful ignorance of the impossibly consistent returns from their IA accounts, which guaranteed high annual rates despite market downturns. They acknowledged during an SEC investigation that the accounts had never experienced losses, recognizing that such steady returns suggested fraud and that no actual securities were being traded. Additionally, they noted trading discrepancies in account documentation, such as impossible volumes of options traded on certain days and transactions at prices outside daily ranges. Despite having access to necessary market data, Avellino and Bienes chose to overlook these anomalies.

From November 1978 to July 1992, the A. B account documentation raised significant concerns regarding BLMIS' convertible arbitrage investment strategy, revealing numerous inconsistencies. Over 90% of trades were reported at volumes exceeding the day's total trading volume by 30 times, with some trades exceeding it by 500 times. Additionally, about 44% of trades occurred on days with no trading volume for the corresponding securities, and 75% of approximately 1,000 securities had reported prices outside the daily market price range.

Between December 1978 and November 1986, Avellino and Bienes received statements indicating backdated trades. For example, a September 1979 statement for account 1A0045 showed six transactions dated two months earlier, which were absent from the earlier statements. Industry standards dictate that trades should appear on the statements for the month they occurred.

Avellino and Bienes also demonstrated awareness or disregard regarding BLMIS' auditor, Friehling & Horowitz, a small firm incapable of handling BLMIS' scale. They were aware of the firm's avoidance of AICPA's peer review program and chose to overlook these discrepancies, likely knowing BLMIS was fraudulent.

In a televised interview on February 9, 2009, Bienes falsely claimed ignorance of the BLMIS fraud and stated he never verified stock transactions due to their seemingly small gains. At that time, he was aware of backdated trades on account statements, which included substantial reported gains, such as a trade in January 1991 that purportedly generated over $18 million.

Bienes reported receiving approximately 9.5% to 10% returns after reinvesting with BLMIS following the liquidation of A.B., despite being aware of Madoff's promise of 11-17% returns and the side payments he and Avellino received. He claimed to have distanced himself from Madoff, stating he had no clients and did not refer anyone to Madoff. Bienes was uncertain about whether clients of S.P. and P.S. invested through A.B., despite receiving a share of management fees from those clients. When questioned about the reinvestment patterns of A.B. investors, he expressed indifference and admitted to not tracking the investments. Bienes acknowledged the oddity of BLMIS employing a small auditing firm and revealed he had never experienced a financial loss. He described BLMIS as a "money machine" and avoided scrutiny of Madoff, fearing it could jeopardize his income source. Bienes confessed to willingly ignoring how the money was obtained. Later, Bienes, his wife, Avellino, and Thomas Avellino invoked their Fifth Amendment rights against self-incrimination when the Trustee sought to question them about Madoff and BLMIS. The Trustee initiated this adversary proceeding on December 10, 2010, amending the complaint on November 24, 2011, with thirteen counts outlined within. A motion to dismiss the Amended Complaint was filed on January 28, 2015, by some defendants, including Bienes and others, who argued that the complaint failed to demonstrate their knowledge of Madoff's fraudulent activities or the Ponzi scheme nature of his business.

Transfers made more than two years prior to the Filing Date are protected under 11 U.S.C. 546(e) safe harbor provisions. The Defendants argue that the Amended Complaint does not sufficiently allege willful blindness, thus permitting transfers within two years of the Filing Date to be defended under the good faith provision of 11 U.S.C. 548(c). They maintain that Avellino’s knowledge cannot be attributed to Mrs. Avellino, other non-individual Defendants, or their partners. 

Key legal arguments focus on the Trustee's standing and the Court's jurisdiction. Notably, the Defendants assert that the Trustee cannot recover transfers from Madoff's prior sole proprietorship, while the Trustee counters that BLMIS’s transition to a limited liability company in 2001 does not affect standing. BLMIS was always a SIPC member, and previous court rulings deemed the corporate form change irrelevant. The substantive consolidation of the Madoff and BLMIS estates allows the Trustee to recover transfers made by the sole proprietorship. 

The SIPA statute enables the Trustee to treat customer property as "property of the debtor," facilitating recovery of transfers by BLMIS, while Madoff's individual transfers remain unreachable by Madoff’s bankruptcy trustee. Substantive consolidation did not grant Madoff's chapter 7 trustee SIPA trustee powers. Following SIPA proceedings, creditors filed an involuntary case against Madoff, leading to the appointment of Alan Nisselson, Esq. as the chapter 7 trustee for Madoff's estate and a consent order for substantive consolidation of the estates.

Each trustee retained their distinct powers and responsibilities despite the substantive consolidation of estates. The SIPA trustee maintained the authority to avoid and recover transfers of customer property under SIPA, while the Madoff trustee’s powers were confined to those typical of a Chapter 7 trustee, allowing him to pursue claims under the Bankruptcy Code in consultation with the SIPA trustee and SIPC.

The Inter-Account Transfer Decision clarified that the Trustee did not possess the authority to avoid and recover transfers made by Madoff's sole proprietorship. Instead, it focused on calculating net equity for customer accounts that received inter-account transfers, rejecting claims that such transfers fell under the Bankruptcy Code's avoidance provisions. The methodology employed by the Trustee was approved, which involved recalculating net equity based on the Net Investment Method, crediting the transferee account with the transfer amount up to the transferor account's net equity.

Objections regarding the applicability of the inter-account transfer method for transfers predating January 1, 2001, were dismissed. The Court noted that Madoff was a SIPC member since 1970, and the nature of his business did not affect the net equity calculations or the characterization of fictitious profits. Although pre-2001 inter-account transfers were relevant for net equity computation and fraudulent transfer analysis, the Trustee could not pursue recovery of cash withdrawals made by the sole proprietorship, as such property was not under the Madoff sole proprietorship's control. Only the Madoff trustee could recover actual transfers from the sole proprietorship, and the Defendants' additional arguments regarding jurisdiction and standing were deemed unmeritorious.

Defendants contend that their investments in BLMIS should not be classified as customer property because they invested as clients of an investment advisor rather than as a broker-dealer, and BLMIS held these investments in the Defendants’ names. Under SIPA, the trustee has the authority to recover transfers of customer property, which is defined to include cash and securities held for a debtor's accounts. The funds deposited by Defendants with BLMIS qualify as customer property under SIPA. The trustee's actions aim to recover this customer property, even when targeting the Defendants’ own principal deposits. Defendants argue that their lack of specific instructions to BLMIS regarding securities transactions exempts them from customer status; however, no such specific authorization is necessary to establish this status. 

Additionally, Defendants assert that the trustee cannot pursue fraud claims, but the trustee is not bringing fraud claims; instead, he is invoking statutory avoidance along with disallowance and subordination claims, which he is authorized to pursue. 

The excerpt also outlines the legal standards for motions to dismiss. A complaint must present sufficient factual content to support a plausible claim for relief, a determination influenced by the context of the case. The court evaluates the plausibility of claims based on factual allegations rather than legal conclusions. It employs a two-step approach: first, it discards any legal conclusions that do not merit the presumption of truth, and second, it assesses the remaining well-pleaded factual allegations to determine if they plausibly suggest entitlement to relief.

Courts must evaluate a complaint in its entirety and consider relevant sources when addressing Rule 12(b)(6) motions to dismiss, such as documents referenced in the complaint or those subject to judicial notice. A complaint encompasses any attached exhibits, documents referenced within it, and materials integral to the complaint—defined as those heavily relied upon by the complaint. However, mere limited references to documents do not suffice for incorporation. 

Counts One and Two of the complaint aim to recover transfers from BLMIS to the Defendants made within two years prior to the Filing Date under section 548 of the Bankruptcy Code. Counts Three through Six address transfers made within six years under New York law, while Count Seven seeks recovery of all initial transfers under New York law, regardless of timing. Count Eight targets a preferential transfer to Strattham. 

The Trustee's ability to recover these transfers has been constrained by rulings from the Second Circuit, the Southern District of New York, and the current court due to the safe harbor provision in 11 U.S.C. § 546(e). The Trustee may only avoid intentional fraudulent transfers under § 548(a)(1)(A) within two years of the Filing Date unless the transferee had actual knowledge of the fraudulent scheme. The safe harbor aims to uphold the expectations of genuine investors. If a transferee is aware that BLMIS was not conducting legitimate transactions, the Trustee can pursue recovery of preferences and fraudulent transfers as allowed by law. Nevertheless, the transferee's knowledge is pertinent under § 548(c), which offers a defense if the transferee acted in good faith and for value.

The Trustee, in seeking to recover principal and fictitious profits, must demonstrate the transferee's lack of subjective good faith, specifically that the transferee ignored facts indicating a likelihood of fraud. In this context, actual knowledge of BLMIS's fraudulent activities is required for certain counts, while willful blindness—defined as having a high probability of a fact's existence but deliberately avoiding knowledge of it—may suffice for recovery under 11 U.S.C. 548(a)(1)(A). Actual knowledge involves a firm awareness without doubt, while willful blindness reflects strong suspicion coupled with intentional ignorance of "red flags" suggesting fraud. Although defendants initially contested this claim, their attorney ultimately acknowledged that the Trustee had sufficiently alleged willful blindness as per the Merkin standard, with statements made during oral arguments being considered binding judicial admissions.

In the case No. 01-CV-7394, the court addressed the issue of actual knowledge regarding the actions of Avellino and Bienes during a 1992 SEC investigation. The court noted that both defendants had joined a motion and did not contest a prior concession, leading to an assumption of their acquiescence. Four categories of allegations were identified that pertain to their actual knowledge: (1) dishonest acts during the SEC investigation; (2) evasion of an SEC injunction through the establishment of post-1992 entities and accounts, along with diversion tactics for customer referral fees; (3) existence of significant warning signs; and (4) questionable financial adjustments referred to as "Schupt" adjustments.

The Trustee's extensive discussion on the 1992 SEC investigation highlighted fraudulent activities by Avellino, Bienes, and Madoff, suggesting that they were aware of false statements made to the SEC. However, the court found no sufficient evidence that Avellino or Bienes knew about Madoff's broader fraudulent activities against his customers. Specific allegations linked the SEC fraud to fraudulent withdrawals related to a Ponzi scheme, notably involving the creation of a so-called "Phony A. B IA Account" shortly before testimony was given to the SEC. The Amended Complaint indicated that significant withdrawals were made from this account, which were allegedly based on fictitious profits.

However, the facts presented in the Amended Complaint contradicted these allegations, showing that the Phony A. B IA Account was funded through transfers from other A. B-related accounts, meaning that the overall value of these accounts remained unchanged. This raised the possibility that A. B believed they were withdrawing their own funds rather than fictitious profits.

The Amended Complaint asserts that after the SEC lawsuit began and an injunction was issued, A. B. Avellino and Bienes attempted to evade the injunction by directing former investors to other feeder funds associated with Madoff, earning commissions from these investments. They also established Post-1992 Entities, which commingled assets and created accounts for investing. Despite these actions suggesting dishonesty, there is insufficient evidence to conclude that Avellino or Bienes were aware that Madoff was not executing trades with the funds they directed to him.

The Complaint identifies several "red flags," such as consistently high annual returns, dubious trading activities, and questionable auditing practices. However, the Court referenced a previous ruling (Picard v. Legacy Capital Ltd.) stating that the "red flag" theory of actual knowledge had been dismissed in similar Madoff-related cases, as it relied on hindsight. Many of these red flags were known to investors and the SEC, becoming apparent only when comparing Madoff's account statements with market data. The requirement for proving actual knowledge in Madoff cases is stringent, and the Trustee’s allegations do not convincingly demonstrate that Avellino or Bienes had actual knowledge of Madoff's fraudulent activities. The inconsistencies in Madoff's returns and the auditors' credibility were publicly known, and the specific trading anomalies mentioned would not have been discernible to Avellino and Bienes without detailed comparisons to broader market information, which the Trustee does not allege they undertook. The claim that they could have easily accessed price information is based only on belief, lacking concrete evidence.

The excerpt outlines the implications of the Schupt process in relation to Avellino's involvement in fraudulent activities at BLMIS. It emphasizes that while the Trustee alleges negligence on the part of the defendants for failing to recognize that trades were outside daily prices, the Schupt process suggests Avellino had knowledge of the withdrawals from accounts linked to fictitious trades. The Amended Complaint claims that A.B. received guaranteed returns through adjustments made via the Schupt process, which involved BLMIS employees and Avellino tracking returns and side payments, indicating Avellino's direct engagement in orchestrating transactions that misrepresented actual trading.

Instead of direct cash payments, BLMIS utilized fictitious option trades to generate the necessary funds for guaranteed returns, an approach that implies Avellino was aware of the lack of real securities trading. The document notes that the crux of the Trustee's claims hinges on Avellino's actual knowledge, which, under Florida partnership law, can be imputed to the partnerships he was involved with. This legal principle suggests that any knowledge held by Avellino regarding partnership affairs is attributed to the partnerships themselves, strengthening the case against the other entities associated with him. The excerpt further establishes that a principal-agent relationship exists between Avellino and the partnerships, reinforcing the argument of his control and involvement in the fraudulent activities.

An agent's acceptance of an undertaking and the principal's control over the agent's actions are essential elements of agency law, as demonstrated in Picard v. Shapiro. Generally, an agent's knowledge within the scope of their agency is imputed to the principal, binding the principal to that knowledge, even if not directly communicated. Florida law similarly recognizes that an agent's knowledge, received within their employment scope, is attributed to the principal.

The Amended Complaint alleges that Thomas Avellino, as the sole decision-maker of Strattham, controlled its investments in BLMIS, including negotiating for guaranteed returns and engaging in side payments. Strattham reportedly received $205,284 in fraudulent payments during 2004-2005, indicating Avellino's actions on its behalf and his knowledge of fictitious trades are imputed to Strattham.

Similarly, St. James, created by Bienes and Mrs. Bienes for investing in BLMIS, was also directed by Avellino, who negotiated for it as well and facilitated the opening of its account. St. James received $324,398 in side payments during the same period, and Avellino’s knowledge of the related fraudulent activities is imputed to it.

Defendants argue that Avellino's knowledge cannot be imputed to non-individual defendants to meet the case's actual knowledge requirements, citing several cases. They further claim that imputed knowledge does not establish bad faith, referencing additional legal precedents.

Knowledge acquired by a general partner or agent during their employment is legally imputed to the partnership or non-individual principal. This principle is grounded in both statute and common law, asserting that a non-individual principal can only gain knowledge through its agents. The court cases referenced affirm that knowledge can be imputed to corporations, which lack independent belief or intent. Under the Defendants’ argument, it would be impossible for a non-individual principal to be liable for actions requiring proof of scienter, leading to an illogical outcome.

The Defendants’ cited cases (Harte, Jehly, and Snook) dealt with the imputation of an agent’s knowledge to individual principals, a point further clarified by a California appellate decision that noted those cases did not pertain to corporate principals. In a New York case, the court ruled that actual knowledge for license revocation must be strictly construed, only being imputed if a corporate officer or registered broker had actual knowledge of a violation. Similarly, in Lihoset v. I.W., knowledge acquired by a truck dispatcher could not be imputed to the corporate principal for a retaliatory discharge claim, as the dispatcher was not involved in the discharge decision. Conversely, in Weidler v. Big J Enterprises, the court imputed knowledge because the agent was involved in the termination process.

These rulings illustrate the distinction between agents acquiring information within the scope of their employment, who are obligated to inform their principal, and those who do not have such a duty. In this case, Avellino, as an agent for the Post-1992 Entities regarding their BLMIS Accounts, had his knowledge and actions imputed to those entities, which are the Defendants involved in initial transfers from BLMIS after 2000. Counts Three through Seven of the legal action rely on the New York Debtor and Creditor Law for recovering fraudulent conveyances.

Avellino's actual knowledge that BLMIS was not trading securities in connection with the Schupt process means that the safe harbor provision under 11 U.S.C. § 546(e) does not protect the claims against him. The Trustee can utilize 11 U.S.C. § 544(b)(1) to invoke New York's fraudulent conveyance laws, which allows for the avoidance of transfers made by the debtor that are voidable by an unsecured creditor with an allowable claim. The Trustee's claims are contingent on the existence of such a creditor. The Defendants raise three objections to the application of § 544(b)(1): 

1. The statute of limitations has expired for transfers sought in Count Seven that occurred more than six years before the Filing Date.
2. The Trustee did not specify an exact creditor that supports the claim under § 544(b).
3. The Trustee cannot simultaneously assert that the Defendants were aware of the Ponzi scheme while claiming it could not have been discovered with due diligence.

Judge Lifland previously ruled that under N.Y. C.P.L.R. §§ 213(8) and 203(g), the Trustee has two years from the discovery of fraud to file a claim. Count Seven, which seeks to recover intentional fraudulent transfers, is the only count extending beyond the six-year limit. The existence of a creditor who could not have discovered Madoff's fraud until it became public is a factual matter; however, there are limits on how far back the Trustee can pursue claims, as BLMIS could not have made fraudulent transfers prior to January 1, 2001. Additionally, Madoff's individual trustee cannot recover transfers from Madoff's sole proprietorship.

Regarding the second challenge, the Defendants argue that the Trustee must identify a specific unsecured creditor with an allowed claim. However, this position contradicts established law in the District, which allows for the identification of a category of creditors rather than a specific creditor to put defendants on notice and allow them to mount a defense. Relevant case law supports the Trustee's position, indicating that general identification of creditor categories suffices for the claims to proceed.

The Amended Complaint asserts that throughout the relevant period of the Initial Transfers, at least one unsecured creditor of BLMIS held a claim that was either allowable under section 502 of the Bankruptcy Code or only disallowable under section 502(e). The Court previously determined that these allegations were adequate to demonstrate the presence of a qualifying unsecured creditor under 11 U.S.C. 544(b)(1). Evidence of substantial distributions to BLMIS creditors supports the existence of allowed claims on the Filing Date. The Defendants argue that the Trustee's claims are inconsistent, suggesting that if they were aware of the Ponzi scheme, no other creditor could have been unaware. However, the Amended Complaint clarifies that Madoff's scheme was undetected by many, including the SEC, yet does not preclude the possibility of certain individuals being informed, as seen with Avellino's awareness of the non-trading of securities.

Regarding defenses, the Bankruptcy Code 548(c) allows a defense for good faith transfers, which the Defendants claim applies as they provided value by bringing in investors. However, the Amended Complaint contends that the Defendants did not act in good faith, asserting their actual knowledge of BLMIS's fraudulent activities and implying willful blindness, suggesting that the 548(c) defense may not apply even if value was given. The Defendants also argue that the Amended Complaint fails to adequately plead fraud; however, the Trustee is not pursuing common law fraud claims. Additionally, the Amended Complaint posits that individual defendants can be held liable under an alter ego theory for the fraudulent transfers received by non-individual defendants. The chart provided delineates the non-individual transferees and their alleged alter egos, emphasizing that veil piercing is unnecessary since partnership law already holds general partners liable for the partnerships' actions.

The Court will focus on the A. B Pension Plan, the Avellino Family Trusts, and the Frank Avellino Trusts (collectively, the “Avellino Trusts”) as identified by the Trustee. The Defendants argue that the Trustee lacks standing to pursue alter ego claims related to the Avellino Trusts, claiming that such claims belong to creditors and are barred by the doctrine of in pari delicto. They also assert that the Amended Complaint does not adequately state a claim for alter ego liability. State law, particularly as determined by the state of incorporation, governs the ownership of claims and the applicability of corporate veil piercing in bankruptcy avoidance actions. 

The Amended Complaint cites Florida law, noting that the corporate and partnership transferees are formed under Florida law, while the trust defendants have Florida addresses, though their formation state is not specified. The parties have implicitly accepted the application of Florida law through their briefs, even as they assume that New York law governs. 

The Defendants' challenge to the Trustee’s standing is deemed unfounded, as Florida law treats veil piercing as a remedy rather than an independent claim. Alter ego serves to impose liability on individuals for corporate acts and is not a standalone cause of action. The remedy for piercing the corporate veil is tied to an underlying claim for which the corporation is liable. 

The Trustee possesses standing to pursue avoidance claims in the Amended Complaint and, if successful, can seek alter ego remedies under Florida law. Generally, a chapter 7 trustee can bring an alter ego claim if it benefits all creditors and is permitted by state law. In contrast, individual creditors may assert claims if they suffer unique harm, while a trustee cannot pursue an alter ego claim based solely on injuries specific to one creditor.

The Trustee has standing to represent the customer property estate due to a unique, personal injury from fraudulent transfers received by the Defendants. Unlike other creditors, whose claims were not harmed but potentially benefited from the transfers, the BLMIS customer estate is identified as the sole victim. The Trustee may pierce the corporate veil of the non-individual Defendants under Florida law, despite the Defendants' assertion that the alter ego claim is solely a creditor remedy. The case In re BLMIS is distinguished, as the Trustee does not pursue common law claims of other creditors. The Defendants' argument invoking the in pari delicto doctrine, which prevents a party from recovering damages resulting from its own wrongful conduct, is also rejected. While this doctrine is flexible under Florida law and related to the agent-principal relationship, it does not bar the Trustee’s claims as these are explicitly granted by the Bankruptcy Code and SIPA. The applicability of in pari delicto depends on the specific facts and public policy considerations, which cannot be resolved at the motion to dismiss stage. The Court acknowledges the Trustee's standing to assert veil piercing claims but refrains from determining whether such claims against the Avellino Trusts are adequately stated. Notably, only two specific trusts received subsequent transfers after 2000, and the Trustee has not provided the trust agreements or their provisions in the Amended Complaint, leaving the applicability of the alter ego theory to trusts as a matter of state law.

Florida law regarding the application of alter ego liability to irrevocable trusts is currently unsettled. In the case of *Henkel v. Bros. Mill, Ltd.*, the court rejected the application of the alter ego doctrine to an irrevocable trust, citing the protective nature of the Florida Trust Code, which limits creditors' recovery against such trusts. The Ohio District Court later adopted this reasoning, affirming that Florida law does not extend the alter ego doctrine to irrevocable trusts. 

The Amended Complaint does not clarify whether the Avellino Trusts are revocable or irrevocable, but their names imply they may be revocable. Under Florida law, revocable trusts allow for what is essentially reverse veil piercing, making the property subject to the claims of the settlor's creditors. A trustee's personal liability for torts or obligations is contingent on personal fault. 

Avellino's fraudulent transfer liability arises from his control over the trust accounts as trustee, potentially making him personally liable for fraudulent transfer debts. Given the lack of argument regarding the applicability of piercing the trusts' veils and the unnecessary nature of such action for imposing liability on Avellino, the court declined to address this issue. Consequently, the court denied the defendants' motion concerning Counts One through Seven for the Post-1992 Entities, while limiting the fraudulent conveyance claims in Count Seven to transfers made by BLMIS. Claims for initial transfers under Counts One through Seven were otherwise granted for dismissal.

Strattham is alleged to have received preferential transfers amounting to $4,250,000, derived entirely from fictitious profits. Since Avellino's knowledge is attributed to Strattham, the safe harbor provision does not apply, leading to the denial of the motion to dismiss Count Eight. 

Count Nine seeks to recover avoided initial transfers from subsequent transferees. While the Defendants aim to dismiss this count, they do not contest the sufficiency of the transfer allegations. Instead, they argue that the subsequent transferees should be treated like the initial transferees, claiming a failure to plead actual knowledge or a basis for imputation. The motion to dismiss Count Nine against the post-2000 subsequent transferees is denied. Under Section 550(a)(2) of the Bankruptcy Code, the Trustee can recover from any immediate or mediate transferee unless the subsequent transferee took in good faith for value without knowledge of the transfer's voidability. A subjective standard for good faith applies, placing the burden on the Trustee to demonstrate a lack of good faith, equated with willful blindness. The Court finds that the Amended Complaint sufficiently pleads willful blindness concerning the post-2000 subsequent transferees.

Claims against earlier subsequent transferees are dismissed since they received transfers before 2001, when BLMIS was not operational, making the initial transfers non-avoidable. Additionally, Defendants argue the Trustee cannot recover inter-account transfers or credits as they do not deplete the estate, but the Trustee clarifies that he seeks to recover actual cash withdrawals from BLMIS.

Counts Ten, Eleven, and Twelve aim to disallow or subordinate claims from Strattham, KJA, and Mayfair Bookkeeping based on their involvement in the BLMIS fraud and withdrawals harmful to other creditors. Strattham and KJA withdrew $29,850,000 in initial transfers, while the Claimants received $5,525,000 in subsequent transfers. The Court has previously established that Avellino’s knowledge of BLMIS's fraudulent activities is imputed to Strattham and KJA, and as the president of Mayfair Bookkeeping, Avellino's knowledge is also attributed to that entity.

Defendants acknowledge that the Amended Complaint sufficiently pleads willful blindness, indicating they received transfers in bad faith. 

Count Ten addresses SIPA Equitable Disallowance, arguing that Claimants had actual knowledge of BLMIS's fraud or willfully blinded themselves, thereby facilitating the fraudulent activity. The Defendants failed to present specific arguments against Count Ten, leading to the denial of their motion to dismiss.

Count Eleven seeks disallowance of claims based on general equitable principles, asserting that Claimants gained unfair advantages at the expense of innocent customers. Defendants concede that equitable disallowance is a potential remedy but argue that the Complaint does not adequately show inequitable conduct. The Court finds that the Complaint sufficiently alleges that Claimants received transfers with knowledge of Madoff's fraud, harming BLMIS creditors by depleting funds available for distribution. Thus, the motion to dismiss Count Eleven is also denied.

Count Twelve asserts an equitable subordination claim based on similar conduct as Count Eleven. Defendants argue that the Trustee lacks standing and is barred by the in pari delicto doctrine; however, the Court, referencing Merkin, determines that equitable subordination arises under 11 U.S.C. 510(c) and that the Trustee has standing if the conduct harmed the creditor body as a whole. The Amended Complaint alleges significant withdrawals made with bad faith knowledge, injuring net losers, leading to the conclusion that the equitable subordination claim is valid.

Count Thirteen seeks to hold general partners liable, as identified in Exhibit F of the Amended Complaint, if their respective partnerships cannot satisfy judgments against them.

The Court has established that the knowledge of general partners is attributed to the partnerships they represent. Under Florida law, general partners hold joint and several liability for the debts of both general and limited partnerships. The defendants did not adequately address Count Thirteen in their motion, which means that if claims against partnership transferees are upheld, Count Thirteen must also stand. The Court found other arguments presented by the parties to be moot or lacking merit. 

The Amended Complaint suggests that Grosvenor Partners, Ltd. may be a limited partnership and details specific financial transactions, including a notable $25,000 wire transfer in 2001 and transfers totaling $7,594,076 to Mayfair Bookkeeping from BLMIS between 1997 and 2005. However, evidence shows only a single deposit of $2,742,892 into the Mayfair Bookkeeping account, with no withdrawals, and no initial transfers from BLMIS to Mayfair Bookkeeping are documented. 

Discrepancies regarding the appointment and involvement of the Receiver prior to the District Court's order on November 18, 1992, are noted but deemed immaterial. The document also lists several accounts associated with individuals and entities related to the case. Additionally, there is a discussion regarding the potential misinterpretation of the term "schtup" used by BLMIS employees, with implications of derogatory meanings. Lastly, several trustees connected to various trusts are mentioned, noting they are not named defendants in the Amended Complaint.

S.A. is named as a defendant in Count Nine of the Amended Complaint, which alleges a subsequent transfer received in 2007. The District Court's Order from December 15, 2008, is registered as ECF Doc. 1 in adversary proceeding no. 08-01789. A Form BD filed by BLMIS is attached as Exhibit B to Kevin H. Bell's Declaration dated June 6, 2014. BLMIS acquired all assets and liabilities of Madoff’s prior broker-dealer business, including its SEC registration number, but not fraudulent transfer claims, which belong to creditors under non-bankruptcy law. These claims only become part of the estate when recovered. Under SIPA § 78fff-2(c)(3), if customer property is insufficient to cover claims, the trustee can recover property transferred by the debtor that would have been customer property if not for the transfer, treating it as customer property upon recovery.

Mr. Picard appears to have succeeded Mr. Nisselson as the trustee of Madoff's estate. The defendants challenge the trustee's standing regarding alter ego liability and argue against the Cohmad decision, which they believe should be overruled. This decision was linked to the safe harbor provisions in 11 U.S.C. § 546(e), and Judge Rakoff ordered that remaining adversary proceedings be returned to the Bankruptcy Court. The court declined to overrule Cohmad.

During a hearing, a discussion arose regarding whether the trustee had sufficiently alleged willful blindness, with a comparison made to the Merkin case. However, allegations regarding Bienes’ knowledge of Schupt activities were deemed conclusory and insufficient to support that Bienes knew those payments were linked to fictitious trades and profits. The Amended Complaint also includes assertions that knowledge of individuals is imputed to entities under an alter ego theory, though it does not establish individual liability for the entity’s fraudulent transfer debts.

The "Frank Avellino Trusts" encompass multiple trusts, including the Avellino Family Trust and several revocable and grantor retained annuity trusts established by Frank J. Avellino. The defendants' reliance on Caplin v. Marine Midland Grace Trust Co. and Giddens v. D.H. Blair is deemed erroneous, as these cases assert that a bankruptcy trustee lacks standing to pursue claims that belong to creditors. In contrast, the Trustee's claims under SIPA and the Bankruptcy Code for recovering customer property are not barred by the doctrines of in pari delicto or the Wagoner Rule. The Trustee's ability to recover hinges on avoiding the initial transfer of assets to the irrevocable trusts, which, once transferred, are not considered part of the settlor's estate. Additionally, the Trustee seeks to hold the settlors of the Avellino Trusts liable for alleged fraudulent transfers through traditional veil piercing. The Court has previously dismissed defendants' claims regarding the Trustee's lack of standing for preference claims, noting that while some claims may overlap, equitable disallowance and subordination claims might still persist even if avoidance claims fail due to safe harbor provisions or statute limitations. The relationship between SIPA and equitable claims indicates that a customer may not be denied property rights unless fraud or other inequitable conduct is established.

Defendants have not argued against the principle established in Merkin, which states that a bankruptcy court lacks the authority to disallow a claim based on general equity unless permitted by relevant non-bankruptcy law. They acknowledge that equitable disallowance is a possible remedy. Under Florida Statutes, specifically § 620.8306(1), all partners are jointly and severally liable for partnership obligations unless otherwise agreed or dictated by law. Similarly, § 620.1404(1) establishes that all general partners are jointly and severally liable for the obligations of a limited partnership, barring any agreements to the contrary. This provision has been in effect since January 1, 2006, following Florida’s adoption of the Revised Uniform Limited Partnership Act, without altering existing laws. Additionally, partnership law confirms that a general partner in a limited partnership is jointly liable for its debts and obligations, as referenced in various statutes and case law.